The latest example of this can be found at New York-headquartered Centerbridge Partners. This week, PERE revealed the firm closed its second real estate fund on $2.3 billion, 50 percent more than the $1.5 billion originally targeted and two and half times the size of its debut fund, which closed in 2018.
Investors had a decent experience with Centerbridge’s maiden vehicle, which, at writing, was returning a net IRR of 24 percent, according to a July 2021 meeting document from the Connecticut Retirement Plans and Trust Funds. At the heart of the firm’s value-add risk and return investment thesis are what were once-called ‘alternative’ investments.
Since Centerbridge Real Estate Partners Fund 1 closed, assets once viewed as leftfield have accelerated into the mainstream, largely at the expense of traditional asset types such as offices and retail properties. Subsequently, managers like Centerbridge, which are operating programs designed to provide investors with market share in these sectors, have soared in their popularity.
Centerbridge has accessed alternative property types through lateral thinking. Approximately 25 percent of Fund 2 has been deployed across seven deals, mainly in the public markets. The early months of the pandemic offered a chance to access public market? assets that were unavailable on the private side. William Rahm, the firm’s real estate head, told PERE recapitalizations, corporate purchases and debt could offer other conduits to dealflow, as well.
Such dexterity is now a must for any institutional player aiming for an early-mover advantage as real estate’s asset classes establish a new world order. QuadReal, the real estate investment arm of the British Columbia Investment Management Corporation, is another recent example of this recognition. It acquired a large minority stake in New York-listed real estate specialist Ranger Global in December to enhance its chances by adding listed to its existing private investment capabilities, PERE reported this week.
Like Centerbridge’s investors, QuadReal tested the water first investing $1 billion via Ranger’s platform during the pandemic. Overweight on specialty sectors like self- and cold-storage, manufactured housing and cell towers, Ranger outperformed five-year, 10-year and since inception returns of the NAREIT index.
These organizations are among the bold few that made listed plays before ‘rotation’ became the buzz word of the moment and a scramble for assets by private operators in sectors like digital, healthcare, storage and student housing began. Listed opportunities are now fewer than before. But other conduits will materialize, recapitalizations to name one. According to research released this week by secondaries specialist Landmark Partners, 66 percent of the $10.6 billion of transactions closed in 2021 were recapitalizations, while almost 50 percent were transactions involving underlying exposures to the popular asset classes of logistics, rental housing and data centers.
According to Ranger co-founder Scott Tuck, less than 5 percent of the private markets universe is currently allocated to alternative real estate. PERE’s fundraising research supports that: in 2021, $55.97 billion was raised for sector-specific funds but just 2.2 percent was for sectors outside of offices, retail, logistics, residential and hospitality. Among the top 10 US REITs, two are residential focused, one is retail focused. The remainder are digital, logistics, healthcare or self-storage orientated.
Against a backdrop of such scarcity in private markets, a willingness to enter the equities or recapitalization spaces is a must. Managers and investors with an appetite to steal a march building up a ‘new economy’ real estate portfolio need to think creatively about how they go about it.